Educate Yourself

Week in Review
For the week 10/16/2006 - 10/20/2006
Brian Trumbore
President/Editor, StocksandNews.com

The United States confirmed that North Korea had indeed detonated a small nuclear device and the UN levied sanctions barring the sale and transfer of weapons and materials that could be used for WMD, but, as expected, Russia and China immediately said they had problems with inspecting North Korean ships, while South Korea said it would be business as usual in terms of continuing Seoul's policy of engagement, including support for the enterprise zone in the North called Kaesong, which supplies Kim Jong-il with hard currency. North Korea's ambassador to the UN termed the sanctions a "declaration of war" and of course it was all the fault of the U.S.

Secretary of State Condoleezza Rice traveled to the region where she reassured both Japan and South Korea that the U.S. would defend them against Kim, while for its part Japan said it would not go nuclear. Rice reiterated that the Bush administration did not seek to "escalate the crisis."

But the week also saw China finally come down hard on Kim, according to reports (one never knows when it comes to Beijing), as they sent a high-level envoy to talk to the man with the bad hairdo, after which Kim reportedly said he regretted the nuclear test and wouldn't try it again. Kim also supposedly told China's representative that he was interested in restarting negotiations, though exactly with whom is unclear.

Here's what I think Kim realized. Winter is approaching, and it gets cold there. In other words, he realizes he needs China's fuel. He also needs Beijing's and Seoul's ongoing food aid. So why not string things along for another few months. It's about saving his own skin as much as anything else these days for the dictator with a penchant for cognac, the supply of which, too, could be cut off if the sanctions were adhered to.

"After a startling decade during which North Korea has disregarded with impunity virtually every international demand, it's time world powers finally reined in Pyongyang, if for no other reason than self-preservation.

"Thanks to short-sighted gamesmanship - or irresponsibility, take your pick - the international community has not erected a single hurdle in North Korea's march to a nuclear future?.

"The bottom line is: Each time Kim has been warned not to do something, he has gone out of his way to do it.

"In the absence of punishment, missiles have been flown, plutonium processed, bombs built and tested - with little indication that any future path is unthinkable.

"Worse, Pyongyang has made it clear it will do with its bombs and nuclear matter what it pleases, including giving them to terrorists?.

"Perhaps Pyongyang thinks that with friends like China and Russia, it can get away with it. But can those friends be sure they won't suffer the ill effects of an attack?

"Russia and China appear to perpetuate a long-running regional irritant that served comfortable Cold War ends.

"When will Moscow change its tune? Perhaps after Chechen separatists detonate one of Pyongyang's nuclear bombs in a Russian city."

"If Pyongyang fired a nuclear-tipped ballistic missile at Seoul, Tokyo or Seattle, the U.S. would have no choice but to respond in kind, and that would be that. And if Pyongyang sold a bomb to al Qaeda which in turn put it on a container ship and detonated it in Long Beach, the nuclear signature would soon give away its origin. North Korea would then be held 'fully accountable of the consequences of such action,' as President Bush warned last week.

"But the problem with this thinking is that it is lazy and probably wrong. Consider three scenarios, each taking place five years out when North Korea has improved its long-range ballistic missile capabilities and learned to miniaturize its weapons so they can fit in the missile's nosecone

"In the first scenario, Kim, by then 70 years old, decides to throw the dice on his decayed regime by launching an invasion of the South. And to warn the U.S. against fighting alongside its ally, he launches a nuclear-tipped Taepodong missile that explodes over the Pacific just west of Cape Flattery, Wash. How would the next administration respond? It could incinerate the North in minutes, but not without risk of losing a major U.S. city. Would it trade Seattle for Seoul?

"In the second scenario, North Korea sells al Qaeda several batches of weapons-grade fissile material with the agreement that the targets would be in countries that lack a retaliatory capability - Denmark, say, or Italy. Selling the fissile material rather than a bomb would make it considerably easier to pass the material undetected. Terrorists could construct a weapon at another site, explode the material as a dirty bomb, or plant it someplace secure as insurance for a rainy day. Would the next administration make good on Mr. Bush's warning of 'consequences' for North Korea because a neighborhood in Copenhagen has been rendered uninhabitable?

"In the third scenario, North Korea passes highly enriched uranium or plutonium to Iran and perhaps Syria, allowing them to acquire a nuclear-weapons capability much sooner than if they relied on their own efforts. Actually, this scenario needn't wait another week, much less five years, creating two or three nuclear-armed rogue regimes where there was previously one. Tehran, Damascus and Pyongyang also sign a mutual security pact threatening unspecified consequences if any of them is attacked. What punitive measures would the U.S. and its partners have at their disposal then?

"All this is fiction. But it becomes increasingly plausible as the Bush administration responds to North Korea by retreating behind one red line after another."

I watched PBS' "Frontline" program this week, a look back at the first year following the invasion of Iraq, 2003-04. The pitiful actions of a few led to the tragedy we face today; men like General Tommy Franks, who immediately after the fall of Baghdad said 30,000 troops would be all that's left by that September. September 2003! And then he retired. Only to be replaced by the totally inept and unqualified Gen. Rick Sanchez. And then you had Paul Bremer, appointed to lead the Coalition Provisional Authority.

As U.S. News & World Report editor-in-chief Mort Zuckerman notes this week, former House Speaker Newt Gingrich regards Bremer as "the largest single disaster in American foreign policy in modern times." Adds Zuckerman:

"Bremer seemed to feel that he was Gen. Douglas MacArthur in Japan - despite our objective to have Iraqi faces at the head of the government, so that this would not seem like an American occupation."

President Bush conceded the current violence in Iraq is like the 1968 Tet Offensive of Vietnam, a major admission on his part and more than a bit late. In an interview with ABC News, Bush then defended the mission and defined success as "whether schools are being built or hospitals are being opened."

My goodness, as Donald Rumsfeld would say. We've been discussing in this space for years now how the doctors have all fled, if they weren't killed first, and how the militias have been turning the hospitals into their own prisons and torture chambers. And the fact is not one single hospital has been built since we've been there. As for schools, if I hear one more administration official talk about opening 10 or 20 or whatever number, I'll scream. Stop treating us like chumps.

When you hear words such as the president's while at the same time seeing and reading what is actually happening on the ground, where our own secretary of state couldn't land for 40 minutes the other day because the air base was under mortar attack, and where when she finally did land she couldn't take the highway because after 3 ? years we still can't secure it, let alone the rising death toll among American forces, it's easy to understand how in a new poll only 20 percent are more optimistic about Iraq versus 68 percent who are less optimistic. [NBC/Wall Street Journal]

As for the Iraqi government, this week Prime Minister Maliki met with Shiite leaders Moqtada al-Sadr and Grand Ayatollah Sistani in some kind of effort to rein in the militias. But then just two days later Sadr's Mahdi Army captured the southern city of Amarah. [It appears the Iraqi Army then recaptured it.]

Earlier, the government was forced to postpone indefinitely a much anticipated national reconciliation conference. The ethnic cleansing going on in Iraq's neighborhoods is getting worse, if that was possible.

It seems at this point that the only real plan for Iraq will be revealed in the findings of the commission headed up by former Secretary of State James Baker. As reported by Doyle McManus of the Los Angeles Times, one participant told him:

"It's not going to be 'stay the course.' The bottom line is [current U.S. policy] isn't working?.There's got to be another way."

Hopefully they come up with something the American people can agree on. In the meantime we have a president who seems to remind us at least once a week that he is clueless.

Happy 12000! As it turned out, however, while the Dow Jones finished the week above this mark at 12002, Nasdaq declined a bit so we have to call the action 'mixed.' This term also sums up the news on both the earnings and inflation fronts.

For instance bonds were virtually unchanged on the week despite some interesting figures on producer (wholesale) and consumer prices for September.

The PPI was down a whopping 1.3 percent, but the core rate, ex- food and energy, was up a disturbing 0.6 percent. The CPI was down 0.5 percent but the core was up 0.2 percent. For the past 12 months, the CPI, ex-stuff you and I use, is up 2.9 percent. Put it all together and the Federal Reserve will hold the line on interest rates when it meets in a few days, though the 2.9 figure will give some members pause.

Meanwhile, industrial production plummeted 0.6 percent, far weaker than expected, which added to the chorus in the bear camp that the economy is cooling rapidly.

And on the housing front, while housing starts were up a surprising 5.9 percent in September, versus a down 4.9 percent reading in August, the figure for permits, a measure of future activity, was down 6.3 percent. Ergo, we still have problems here and the Fed knows it.

There was a story in the Washington Post this week that cancellation rates in the D.C.-area market have tripled in the past year to 17 percent.

"Developers and builders say buyers are abandoning five-figure deposits on their future homes because they cannot sell their existing homes or did not sell them for nearly as much as they had counted on."

And defaults are rising, nationwide, though here we have to be careful. They are rising to a rate just equal to the historical average, but what's worrisome is that this is all occurring amidst a seemingly solid economy, not what history would tell you, and of course much of it has to do with the banks, their aggressive lending practices, and homeowners who were stretched to the limit even with their 2 percent adjustables and now can't deal with 6 percent rates or higher. In California, statewide, defaults have risen 111 percent in the past year. Imagine if and when the U.S. economy goes into recession.

So it should come as no surprise that on the earnings front, Friday's big story was Caterpillar, which missed its forecast by a mile and blamed a sharp drop in housing construction for lower than anticipated sales. CAT then cried for the Fed to lower interest rates to save the industry.

Otherwise, earnings were the usual mix of hits and misses. On the plus side we had the likes of J.P Morgan Chase, Merrill Lynch, AMR, Continental, 3M, IBM, Coca-Cola, Apple and Google.

On the disappointing end were Motorola, Advanced Micro Devices, Southwest Airlines, Citigroup and Pfizer.

And in the "eh" camp we have the likes of SAP and eBay along with Intel, at least by more scoring.

A few addendums to the above. I don't know how the heck some can say Intel's numbers were great when its revenues were down 12 percent year over year. Yeah, yeah, I know that was what the company had warned so in the convoluted methodology employed by Wall Street that's actually good considering how poorly Intel has been doing. So some analysts were happy Intel had "stabilized." More to the point was AMD's dreadful outlook, citing the ongoing price war in the chip industry.

Southwest's results were disappointing because it warned on actual air traffic, while shares in AMR and Continental rocketed on increased passenger load and falling fuel prices. So some are talking about how discounters are losing out to the premium carriers. If the economy tanks, they all go down, though in the meantime I couldn't be happier for my favorite carrier Continental and its employees.

As for Google, its shares soared $33 on its news, while Apple Computer added it may still face a large restatement of prior earnings due to the ongoing investigation into its options practices.

What does all of the above mean, especially after the spectacular rally in stocks since July? The market is going to need a catalyst if it is to move much higher and the only thing that I see helping would be a continuing slide in oil prices, seeing as the Fed isn't about to lower rates soon. OPEC tried to lay a production cut on us this week and the market totally ignored it, sending oil to 11- month lows below $57. But with the issue of Iran still looming out there, in particular, I'd be surprised if it goes much lower. Certainly stocks in the energy sector are telling you we're near the bottom.

And on the negative side you still have housing. I remain unconvinced the sector will land softly, like Dorothy's house in Kansas. [Was that good construction or what?! They sure don't make 'em like that anymore.]

The Treasury market was unchanged on the week, despite all the inflation data, as it awaits further guidance from the Fed and housing.

--Those of us who keep harping on items like the U.S. trade deficit have to at the same time note that foreigners continue to buy huge amounts of U.S. stocks and bonds. In August, for example, the trade deficit may have been a record $69.9 billion, but foreigners purchased a net $116.8 billion in our securities. Thus, until you see this trend reverse it's pretty tough to make an issue of the trade figures.

--Somewhat related to the above, however, China has now amassed reserves close to $1 trillion in foreign currencies and securities, most of which are invested in dollar-denominated debt, such as U.S. Treasurys. There is no doubt that China, under the right political circumstances, could use these holdings as a club, though as we begin to wrap up 2006 and have the Olympics less than two years away, it's hard to imagine they would do this before then.

[The amassing of dollar reserves is a direct result of China's manipulation of the yuan; to prevent it from strengthening too quickly and hurting China's exports, it buys dollars and issues yuan in exchange which helps hold the Chinese currency's value. At the same time, though, this can help fuel inflation in China because cheaper foreign goods aren't as readily available.]

--China's Industrial and Commercial Bank of China (ICBC) floated an IPO in Hong Kong and Shanghai, a mammoth $22 billion, in the largest initial public offering ever. What the ICBC deal also proves, aside from an appetite for anything China, is that New York and London continue to lose market share to the likes of Hong Kong and Singapore, as well as in this instance Shanghai.

--The Financial Times reported that China is now fifth in patent applications, according to the World Intellectual Property Organization, having passed Germany. I didn't know WIPO considered patents for ideas stolen from the U.S. and Europe.

--Wal-Mart is acquiring China's largest hypermarket chain, Trust-Mart, for $1 billion, which would place it ahead of France's Carrefour in this area. But China is souring on foreign acquisitions of its biggest companies so it will be some time before this is completed, if ever.

--Speaking of France, the incoming CEO for French energy giant Total was imprisoned for 48 hours and charged with corruption in the oil-for-food scandal. Pretty major stuff.

--Incredibly, the editorial board of the Wall Street Journal attempted to defend UnitedHealth Group's soon-to-be-former CEO, William McGuire, who agreed on Sunday to depart after an internal review found millions of stock options were backdated on his watch. In addition, supposedly the board was unaware of the fact a member of the compensation committee was also McGuire's personal financial advisor who stood to gain through McGuire's growing wealth.

It is estimated that at their peak value McGuire's unexercised options were worth close to $1.8 billion, but he could still walk away with over $1 billion in options and retirement payments.

As reported by the Journal's Charles Forelle and Mark Maremont [thankfully the reporters have nothing to do with the editorial board]:

"In October 1999, the (internal) report says, Dr. McGuire suggested in a memo that 'employee morale and retention' were being hurt by old options that carried strike prices above the company's then-market price. The board agreed to suspend a total of two million out-of-the-money options and replace them with a similar number of new options, which were priced at the lowest point of the year. The Wilmer report concluded the new options likely were improperly backdated to that low point to give the insiders an extra boost.

"By the following August, however, the company's stock price had risen significantly. The board then agreed to reactivate the suspended options. So in effect, Dr. McGuire and the others double-dipped, getting back their original options while also keeping the replacement options.

"In Dr. McGuire's case, the Wilmer report found, the maneuver in essence got him an extra 750,000 options, with an instant paper gain of about $26 million. Those options are now valued at about $250 million because of share splits and an increased stock price.

"The report also concluded that the company failed to properly disclose and account for the complex transaction."

--KLA Tencor, a leading supplier of chip-making equipment, is being forced to restate earnings to the tune of $400 million for cooking the books on options related issues from July 1997 through June 2002. So again, investors were making decisions based on fraudulent financial statements. The former chief operating officer and CEO for this period in question, Kenneth Schroeder, who had been on board as a consultant after retirement, was taken out back and sh??..oops, sorry, I was about to let my feelings get ahead of the truth. He was let go.

--Everyone likes to talk about how Russian energy giant Lukoil is still independent of the Kremlin's clutches, but this week the government began to nibble away, as only it can, in stating that Lukoil could lose 19 licenses for prospecting for oil, drilling and starting production at some large fields under its control due to environmental issues such as setting up rigs in state-owned woodlands and illegally cutting trees along the pipeline. [Think Stalin and trumped up charges.]

The real reason for the move, according to experts, is the Kremlin wants state-owned Rosneft to consolidate assets in the disputed regions. A few years from now, fellow "national champion" Gazprom and Rosneft will have swallowed the entire country's asset base.

--Shares in British Energy Group Plc, producer of 20 percent of the UK's electricity and owner of 8 of the country's 12 operating nuclear power plants, fell 24 percent when the company said it had discovered boiler-tube cracks at two plants, forcing them to shut down. This is a blow to Prime Minister Tony Blair's efforts to promote nuclear power.

--The Journal reported the FBI is investigating a series of scams involving identity theft in the posting of online resumes with Social Security numbers and other personal data. One way, for example, is a headhunter calls an individual whose resume has been posted and says he is representing an employer and doing a background check.

--The Chicago Mercantile Exchange and CBOT (the Chicago Board of Trade) look set to merge, combining world leaders in things such as interest-rate futures (including Treasury bonds), currency futures and options with commodities such as corn, soybeans and wheat?plus live cattle futures, which really have no future because live cattle are eventually dead cattle.

--Speaking of the dead, Enron founder Ken Lay had his conviction on fraud and conspiracy charges thrown out because of a 2004 U.S. District Court of Appeals ruling that found that a defendant's death pending appeal extinguished his entire case because dead men really have a tough time of challenging the conviction in court. Actually, the only dead man I can recall defending anything he did in life was Jacob Marley?and Marley had been dead seven years.

--Shares in Dell fell after Gartner Group said Hewlett-Packard took over the top slot in worldwide PC sales.

--Google is now picking up half of all searches on the Web, with Yahoo at 23 percent and MSN 9 percent. While Google shares soared, Yahoo's continue to slide as the company admitted it is having serious problems in its online advertising effort due to increased competition, namely Google!

--Credit Suisse Group lost about $120 million in an ill-fated derivatives bet on the South Korean equity market.

--Immigrants' remittances from the U.S. to Latin America will total more than $45 billion this year; or 51 percent higher than just two years ago.

--The New York City Marathon, which is being run in two weeks, brings $188 million into the Big Apple, while a study of runners' income reveals 15 percent earn more than $250,000.

--Sandy Weill has issued his memoir, "The Real Deal: My Life in Business and Philanthropy." You can rest assured I won't touch it, especially after reading a slew of reviews panning the tome. Such as Janet Guyon's, who reviewed it for Bloomberg.

"(Weill) offers ten lessons for success?.Things like, 'Be brave, but vulnerable,' and 'There's nothing wrong with brand envy.'

"He should have added, 'Remain as self-unaware as possible,' and 'When accused of wrongdoing, blame others and deny, deny, deny.' Only a man deeply ignorant of his own inner workings and motivations could tell this tale of deal-making and backstabbing."

On the Jack Grubman affair, Guyon writes Weill is "similarly disingenuous?using the star telecom analyst's salacious correspondence with a female client to declare that Grubman 'suffered from a serious ego problem and psychological deficiency.' How is that relevant to Weill's admission that he urged Grubman to reconsider his negative opinion on AT&T before the telecom giant planned a mega-IPO that would pay Wall Street firms millions in fees?"

--Here's something else to make you sick, in this era of the likes of William McGuire and Sandy Weill; Tom Freston, the head of Viacom fired by Sumner Redstone after just 8 months on the job will receive a payout of $85 million, including $59 million in severance. It's beyond absurd. Where's my copy of "The Rise and Fall of the Roman Empire"?

--Walt Disney Co. is changing the food offerings at its theme parks by eliminating some unhealthful foods and artery-clogging trans fats. It's also going to change the way its characters are used in promotions to kids; i.e., no more "Roasted Donald Duck sandwiches."

--Ann M. Fudge was added to the board of the Rockefeller Foundation. In a statement the foundation touted Ms. Fudge's heart-healthy and flavonoid-filled background

--And finally, we can't help but note New York State Supreme Court Judge Charles Ramos, a potential "Man of the Year" candidate for his ruling that former NYSE Chairman Dick Grasso must return $10s of millions in compensation, some say up to $100 million, because the Exchange board was not fully made aware of Grasso's pay package. Baby, you've gotta love it. Grasso is appealing the ruling but it would appear he is going to have to cough up a considerable amount of his ill-gotten gains regardless of the outcome. Remember, New York Attorney General Eliot Spitzer began this whole deal by saying Grasso's pay (up to $187 million, cumulatively) was outrageous because the New York Stock Exchange at the time was a not-for-profit organization.

Iran: President Ahmadinejad said Israel was "illegitimate" and that Iran would not back down "an inch" over its nuclear program. But if you live in Europe it had to be unsettling to hear for the first time Ahmadinejad targeting the continent, warning Europe "it may get hurt" for its ongoing support of Israel.

Russia: Former Fed Chairman Alan Greenspan, in a speech in New York, blasted Russia's "national champions," such as those alluded to above; Rosneft and Gazprom. Greenspan also cited the new alliance that formed the world's largest aluminum company. From a pure capitalism standpoint (and ignoring the political implications of Gazprom controlling Europe's natural gas supply), Greenspan notes that companies such as these can not be innovators if they are protected by the state.

Separately, Human Rights Watch and Amnesty International were among 77 NGOs (non-governmental organizations) whose operations were suspended by the Kremlin, forcing them to "reregister" under harsh terms. Anyone out there not understand where Vladimir Putin is taking his country?

Israel: Prime Minister Ehud Olmert met with Putin in Moscow to seek the Russian leader's help in dealing with Iran's nuclear bid, but Putin seemed more interested in the sex scandal swirling around Israeli President Moshe Katsav.

"Pass our best regards to the president of Israel," Putin told Olmert. [Moscow Times]

In public statements after their meeting, Olmert said Putin understood "all the aspects of our attitude toward Iran's nuclear program and everything linked to that," but Putin didn't utter the word "Iran" once. Instead Putin read some prepared remarks talking about Russia helping to resolve the situation in the Middle East. It must not have been a great flight home for Olmert.

Incidentally, Russia is going to begin construction of a new $800 million nuclear power plant in Iran by the fall of 2007.

The Daily Star's Rami Khouri had an interesting take on the Middle East, comparing it to recent efforts in Northern Ireland to bring back power-sharing in the government there after it had been suspended for the past four years.

"Israel and the U.S. refuse to deal with a Palestinian government led by Hamas, which was democratically elected. Yet in Northern Ireland the British and the U.S. had no problem dealing with the IRA, which used terror for many years. Their decision to engage the IRA through Sinn Fein proved wise and productive, because the IRA soon got out of the terror business and decommissioned its arms. That experience suggests that focusing on the substance of the political goals that one desires from a negotiation is more important than allowing oneself to get hung up on whom one should talk to or not talk to.

"Israel and Hamas do not like or recognize each other, but they are both acting irresponsibly in continuing to avoid engaging each other in a political process that gives their people the possibility of living normal, peaceful lives. The same can be said of Iran and the United States. It is instructive for these and other parties in the region to ponder the Northern Ireland situation and acknowledge the importance of focusing on how to achieve desired outcomes that respond to the legitimate rights and needs of both parties to a conflict, rather than getting stalemated on false issues of honor and dishonor in engaging one's adversaries. Northern Ireland has much to teach us all about the business of conflict resolution - and also about acting like adults."

As for any peace efforts between Israel and Lebanon, Prime Minister Olmert said he wanted to talk peace while Lebanon's Prime Minister Siniora reminded Olmert that Lebanon would be the "last Arab country to make peace with Israel."

However, it was curious that at week's end Lebanon's parliament speaker, Nabbi Berri, who you'll recall is both a Shiite and a supporter of Hizbullah, urged the Arab world to negotiate with Israel, saying the time was right for a comprehensive peace effort.

China: A cyber-dissident was jailed for four years for subversion after posting politically sensitive essays on the Net. The group Reporters Without Borders called the charge absurd, while human and media rights groups note that China's leaders are tightening their crackdown on dissent. RWP ranks China 159th of 167 countries on its global press freedom index. [South China Morning Post/Agence France-Presse]

Turkey: Defense News reported that the rift between Turkey's staunchly secular military and the Islamist government of Prime Minister Recep Erdogan is widening and could become a crisis. The Chief of the General Staff, Army Gen. Yasar Buyukanit (something tells me I'll be writing his name a lot in the future), said:

"Aren't there those who at every opportunity express the need to redefine secularism? Are they not in the most senior positions of the state?" referring to the parliament speaker's call to redefine it. "If you cannot answer 'no' to these questions, then there is a threat of Islamic fundamentalism in Turkey, and every measure must be taken against this threat."

Secularist President Ahmet Sezer warned parliament just a few weeks ago, "The fundamentalist threat has not changed its goal to change the basic characteristics of the state."

"Five years into the war on terror, inept U.S. diplomacy risks undercutting a key democracy (and ally) that President Bush once called a model for the Muslim world. The future of Turkey as a secular, Western-oriented state is at risk. Just as in Gaza and Lebanon, the threat comes from parties using the rhetoric of democracy to advance distinctly undemocratic agendas."

Rubin points out that U.S. Ambassador Ross Wilson has stupidly dismissed concerns. Rubin concludes:

"Diplomacy should not just accentuate the positive and ignore the negative. When a country faces an Islamist challenge, PC platitudes do far more harm than good. At the very least, the U.S. should never intercede to preserve the status quo at the expense of liberalism."

On the EU candidacy front (which as I wrote the other day is really dead), the President of the European Commission, Jose Manuel Barroso, said it could be up to 20 years (not 10) before Turkey joined the club, citing a slowdown in reforms, including a resolution over Cyprus. Erdogan's government faces an election next year and he isn't about to compromise.

Britain: Tony Blair came to the defense of his former defense secretary Jack Straw, who said Muslim women should not wear the full-face veil.

"It is a mark of separation, and that is why it makes other people from outside the community feel uncomfortable.

"No one wants to say that people don't have the right to do it. That is to take it too far. But I think we need to confront this issue about how we integrate people properly into our society."

"You can't cover your face; you must be seen. This is common sense, I think. It is important for our society."

Venezuela: It would appear President Hugo Chavez has lost his bid for Latin America's rotating seat on the UN Security Council. 125 votes are needed and Venezuela lost the first ballot to U.S.-preferred candidate Guatemala, 110-77. Now, after 35 ballots, the score is 103-81. This process has been known to go on awhile and balloting begins anew on Wednesday.

Sri Lanka: Long ago, prior to 9/11, I said a car bomb going off in Sri Lanka has zero impact on our markets, but one going off in Tel Aviv can. But the violence here the past two weeks has been horrific, with a suicide attack killing over 90 Sri Lankan soldiers, another aimed at the tourism industry killing at least 16, though missing its intended target, and a full-scale battle between government forces and Tamil Tigers killing over 200 (this last item was two weeks ago).

There have always been fears that the violence could one day spread to India, making it all the more important that Sri Lanka become a bigger focus of the world community.

Dow Jones +0.4% [12002]
S&P 500 +0.2% [1368]
S&P MidCap -0.6%
Russell 2000 -0.1%
Nasdaq -0.6% [2342]

Dow Jones +12.0%
S&P 500 +9.6%
S&P MidCap +5.7%
Russell 2000 +13.2%
Nasdaq +6.2%

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